Building a strategy for serial divestitures

Restructuring strategy for serial divestitures

Whereas mergers often receive a disproportionate share of media attention, they are only one component of the M&A lifecycle. Divestitures, spin-offs, and sales or restructuring of assets have the opportunity to generate tremendous value.

Our research shows that companies that continuously evaluate and pivot their business model and asset mix outperform their peers over the long run and achieve higher returns on their M&A transactions, yet few companies have a regular and structured process in place to do so.

For sell-side M&A, times and markets have changed over the past decade, let alone since the pandemic. In 2017, top drivers for higher-than-expected deal value were multiple competing bidders, availability of tax attributes or benefits, and no significant diligence surprises or issues. In 2022, this sentiment almost flipped to demonstrating improved operating performance and market conditions, as well as the strength and preparation of the management team.

For larger companies with diverse portfolios, now is the time to examine how economic and market disruptions may be affecting specific businesses and permanently altering their return profiles.

Portfolio reviews may lead organizations to realize there are a significant number of products or assets that no longer fit with their organization and could be sold in serial divestitures as part of a sell-side M&A strategy.

That said, portfolio management and separation strategy are only the beginning of the serial divestiture journey. The execution of each divestiture should be prepared and managed effectively, while recognizing how the individual risks and execution hurdles that interfere with value creation and deal success will compound when evaluating several divestitures at the same time.

Many organizations struggle with how to coordinate serial divestitures to maximize total value and minimize complexity and effort, often resulting in lower-than-expected deal value. Common problems we see with serial divestitures include:

• A lack of clarity on divestiture objectives.
• Shifting deal perimeters and changing deal structures.
• Separation “fatigue” and Transition Service Agreement (TSA) convolution.

Prepared sellers are honing their craft by stoically following a few critical steps on their serial divestiture journey, which we outline in detail in our research.

First, meaningful portfolio review criteria needs to be established to facilitate an effective review process. A close connection to an organization’s corporate strategy agenda and priorities is critical. In subsequent frequent portfolio reviews, sellers may ask themselves:

• Is there a path for a given asset to achieve market leadership? Is there sufficient runway/market opportunity to earn positive incremental returns on invested capital for this asset?
• Is the value of this asset optimized under our company’s ownership? Is it accretive/dilutive to our overall multiple? Are there other owners who can better maximize the value of this asset?
• What do valuations look like for comparable assets in similar spaces? Do the financial and resourcing costs of separating the asset justify the value that would be created for shareholders? If not, is there a way to optimize this business for return on capital/cash flow?
• Once a restructuring or divestiture vision evolves, bundling and sequencing assets for sale for the best total outcome is a common challenge for sellers. Experienced sellers ask themselves questions such as:
• Did we conduct enough internal diligence on the deal scope/perimeter and potential buyer universe and their requirements to understand how to sequence?
• Do we understand internal resource availability and capabilities to not bite off more than we can chew?
• Are there macroeconomic concerns, industry cyclicality, or operating issues that influence the ideal time to sell?
• Although no divestiture program is easy, serial divestitures both compound the impact of problems generally encountered through a single divestiture program and create their own unique set of issues that can create value leakage and ultimately inhibit companies from executing a successful proactive portfolio management strategy. That said, there are clear paths to becoming a prepared seller that help organizations navigate their serial divestiture journey.